The concept of open banking in Nigeria

There was a time in Nigeria when you must go to the Bank to enjoy banking services. It was a time when the famous advert “tally number” trended. In an attempt to reduce the congestion in the banking hall, banking licence was liberalised, which gave rise to what was then called new-generation banks. Some of those new generation banks today occupy what we call FUGAZ, the top five banks in Nigeria comprising First Bank Plc, UBA Plc (recall that UBA Plc is the product of a merger between Standard Trust Bank and United Bank for Africa Plc), GTBank Plc, Access Bank Plc and Zenith Bank Plc.

These Banks have, over the years, become old and battling with the same problem that brought them to existence. The issue of banking hall congestion, delays in a queue to receive banking services, transaction failures, high cost of financial services, and the limited number of banking products and services are among customers’ nightmares today. However, to address these issues and unlike in the past when the government took the initiative, the individuals have become innovative. Innovation and disruption is the word in today’s banking world. Innovators have taken it upon themselves to devise a way to provide financial services without obtaining a banking license. Others have developed means to provide ancillary support or services that the banks require to deliver on their service obligations to the customer.

So in today’s world, you do not need to be a bank to deliver financial services. How? Many operators of financial service providers have moved the rendering of financial Services from the banking halls to the palm or desk of each customer through technology and innovation. It is common today for people to have access to loans, open savings accounts, invest, order debit cards, order a chequebook, pay bills, buy entertainment tickets or airline tickets etc., without visiting the four walls of a financial institution. All these are made possible through Applications, otherwise called Apps (They are software designed to carry out a distinct or specific function) created and powered by Financial Technology (Fintech).

Innovators prepare some of these Applications to work on the go, on the palm of the user through mobile phones, Tabs and other mobile devices; hence they are termed Mobile Apps. The company not necessarily licensed by the CBN or need not obtain a license that provides these services on a standalone or use it to support the operation of a Bank is called a Fintech company.

A Fintech company identifies the financial friction it wants to fix and develops its platform to address it. For instance, to reduce the turnaround in obtaining loans, a Fintech may decide to establish a Loan App which can disburse loan requests in minutes, like the conventional model of waiting for days. Of course, the fact that the App grants the loan in minutes does not mean that the system skipped the credit conditions. Still, the difference is that instead of a manual approach, through technology, the borrower is subjected to a series of test that runs in minutes, and based on the result of that test, the system can decide whether to grant and disburse the loan or determine the proportion of the request or in some cases deny the request.

This system achieves this using a series of algorithms (a computer language) that reviews the Lifestyle of the customer and, through this, can determine through Credit Scoring whether the customer qualifies or not. In addition, the borrower’s Lifestyle from his past banking history (withdrawal pattern, saving or deposit pattern, the account running into overdrawn position, account balance, and what the borrower spends money on determines the result) determines the credit score.

Now note that the Fintech Company does not have the borrower’s history, so it would have to establish a relationship with an existing bank where the borrower has a history. It then attaches its platform to that of the Bank to enable it to gain access to the information required to help the system adequately score the borrower. The company uses an Application Programming Interface popularly called API to carry out this handshake. While Applications are for distinct functions, an Interface is a service contract between two applications. The API is the spoon the Fintechs use to eat from the Banks. The agreement defines how the two communicate regarding operating requests and responses.

So imagine that Fintech now has access to the customer’s information. Recall that the Bank must keep and protect and not divulge the knowledge of its customers to third parties, not even spouses. This conventional banking principle is still in force, so for Fintech to gain that access, it makes the borrower accept certain conditions the Bank can confirm before giving access. Some of those conditions include that the Bank should share your Date of Birth, Address, banking history etc., and to some extent, to ensure repayment of loans, the Fintech request you to agree for it to have access and make use of all the information in your device including your contact list.

Once information under the borrower’s authority gets to the Fintechs, no one can control what it does with it, especially as they are not under any regulation. So, for the information not to be misused, there has to be a way that preserves the integrity of all data. Also imagine that there are multiples of loan companies accessing the data in a Bank. Some for loans, savings, investment, account opening etc. This exposure is why we talk about data privacy.

In conclusion, the practice of securely sharing financial data between banks and third parties service providers, such as Fintechs, is called open banking. The Central Bank of Nigeria, in an attempt to ensure that customer data are shared securely, recently released the Operational Guideline for Open Banking in Nigeria in March 2023.